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The case for getting a monthly annuity

Anyone with a lump sum -- a large amount of money -- can get an annuity. Insurance companies will gladly convert it into a stream of monthly payments for life. But a company-provided annuity offers more protections than the type you can buy from a private insurer.

In this case, the company for which Tom Walters has worked for 35 years is giving him a choice in pension payout: He can get a monthly pension check or a lump sum of $475,000. If he takes the lump sum, Tom would have to manage it or hire someone to manage it for him.

Stephen Mitchell, chief operating officer of the Retirement Income Industry Association and former director of the retirement group for Merrill Lynch, seems an unlikely advocate for taking the pension annuity, since he's devoted his life to retirement investments. But he's a staunch supporter of predictable retirement income.

"I wouldn't give up the pension annuity payout lightly," he says. "Retirees should first establish a floor of reliable money that is guaranteed for life. A pension is an important part of that floor. Wrestling over converting a pension to a lump sum and then figuring out how to invest it so you still have a floor is just wasting a lot of energy."

Consider these factors before getting an annuity.

Annuity income is predictable

If you are hale and hearty at age 65, Social Security predicts that you'll live at least another 20 years. That's a lot of rent to pay and groceries to buy. Taking the pension option means that no matter how long you live, you'll continue to receive a monthly check, albeit one that is probably not indexed for inflation.

Women benefit more than men

Company pensions are actuarially gender neutral, even though women employees and spouses of male employees live longer. If you are a married man, the company pension is probably a better deal for your wife than anything that you or she can buy elsewhere. If you are a female employee, think hard before you take the lump sum.

You can't lose it all

You don't have to be an investment genius or superdisciplined when you take the annuity. No matter how you go about it, managing money to provide income for 20 or 30 years or more requires expertise, commitment and taking some risk. If you are eligible to take a lump sum, expect private annuity salesmen and portfolio managers to come calling, eager to manage your money.

Their interest in your future is enhanced by the fact that they will earn somewhere between 1 percent and 4 percent -- and maybe even more -- of the total that you invest in their company's product. In the case of portfolio managers, the average fee is 1.5 percent annually of the amount they are managing.

Sharon Lechter, spokeswoman for the American Institute of Certified Public Accountants and co-author of the financial best-seller "Rich Dad Poor Dad," says 1.5 percent is a bargain for good investment advice. Still, on $475,000, 1 percent is $4,750 and 4 percent is $19,000 -- big money, especially if you don't have a lot of money to begin with.


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